The New World of International Trade Arbitration

by Roger Alford

In the past twenty years the world of investment arbitration has taken the commercial world by storm. There are over 2,750 bilateral investment treaties and almost every one of them has an arbitration provision. Investment arbitration is now a prominent feature of the arbitration landscape.

Just as BITs have proliferated in recent years, so too have free trade agreements. There are approximately 380 free trade agreements now in existence, and yet the question of dispute settlement in the FTA context has rarely featured in the discussion. Sure, there have been NAFTA Chapter 20 cases, and the occasional ad hoc dispute–such as the Canadian-U.S. Softwood Lumber dispute. But international trade arbitration pursuant to FTAs is still in its infancy.

The procedures are similar to investment arbitration. There are provisions for the request for arbitration, establishment of an arbitral panel, rules on arbitrator conduct, rules governing proceedings, evidence gathering and hearings, time limits for the award, etc. There are a few unique provisions, such as drawing arbitrators by lot from a roster of fifteen, and adopting the seat of arbitration as either Seoul or Brussels, depending on which State is the complaining Party. But in most respects the procedures are familiar to other forms of arbitration involving States.

When it comes to remedies, however, the FTA arbitration rules are similar to the WTO. A non-complying State may offer compensation for a violation, or failing that, be subject to retaliatory countermeasures (i.e., increased tariffs). Those tariff increases may not exceed the level applied to other WTO members, but will result in the suspension of duty-free benefits under the FTA. Similar to the WTO, disputes as to compliance measures or deadlines are subject to further arbitration. The traditional recognition and enforcement questions under the New York Convention are irrelevant in this context.

Over 50% of all trade in goods occurs on a preferential basis. Like BITs, FTAs will continue to proliferate. Sophisticated dispute resolution mechanisms in FTAs are long overdue. The future portends a new world of international trade arbitration, and a growing international trade arbitration bar.

6 Responses

Thanks for this post. We will be looking at trade law in my international law class this next week – and the timing is just perfect for my students. Very interesting stuff.
Best,
Ben

11.10.2010
at 6:44 pm EST Benjamin Davis

Very interesting. On a quick read, though, this looks to me more like an effort to make FTAs look like the WTO, than like BITs. No private parties can bring disputes, and arbitrators appointed to a roster by states, hearings must be public, etc. So is this more like BITs, or more like the WTO?

11.12.2010
at 12:39 pm EST Amy Kapczynski

I think it is a hybrid. It has obvious parallels to both investment arbitration and the WTO dispute settlement procedures. The features you highlight are more similar to the WTO than BITs, but there are other features that are more similar to investment arbitration, like the selection of arbitrators by consent of the parties and the panel’s discretion with respect to procedure.

Roger Alford

11.12.2010
at 4:32 pm EST Roger Alford

As in other recent FTAs, this clause is closely modeled on the WTO and incorporates changes that the EU would like to see happen in the WTO, including greater transparency. The WTO’s Dispute Settlement Understanding too provides that panelists are selected in the first instance by agreement between the parties. The WTO DG only selects panelists if the disputing parties do not agree and if one party gives up on further discussions and requests such selection.

One interesting item in the procedures: The decision is supposed to be drafted by the arbitrators themselves, who are not supposed to delegate the job at all. This may reflect EU unhappiness with the WTO secretariat’s role in drafting panel decisions.

This is clearly a departure from DS under the EC’s association agreements of yesteryear — see Tomer Broude’s very sharp article on those dispute settlement procedures, at http://law.bepress.com/expresso/eps/650/ . Disputes in the EC association agreements are settled by a totally political/diplomatic consultation process.

The EU-Korea FTA is part of the EU’s new regional trade policy – and it has DS that is much more automatic, though not completely. These rules and procedures appear to provide that the panel is automatically set up when one party requests, and if there is no agreement on panelists, the panelists are chosen by lot from a roster that has been established by consensus. But of course, if one side refuses to agree on a roster to begin with, the DS process can be totally blocked – the US provided the example of how to do this, when it blocked Mexico’s NAFTA Ch. 20 complaint about US failure to comply with its obligations on sugar market access.

EU-Korea FTA DS also has nothing to do with investment arbitration. These are government to government claims, not investor-state. Yes, the decisionmakers are called “arbitrators”, but so what? The DNA for the procedures and the rules of conduct for such “arbitrators” in the annexes to Chapter 14 clearly comes from the rules and procedures under NAFTA Chapter 20 (not NAFTA Chapter 11).

11.14.2010
at 7:40 pm EST anon

Anon,

Just to be clear, my post was not intended to suggest that the EU-Korea FTA dispute settlement process has anything to do with investment arbitration.

I am suggesting that the proliferation of FTAs with sophisticated dispute settlement provisions could herald a new period of significant international trade arbitration.

We have had some experience with that with NAFTA Chapter 20 and with the Canada-U.S. softwood lumber arbitrations. The fact that it is state-to-state arbitration does not alter the fact that it is arbitration.

Roger Alford

11.15.2010
at 4:54 pm EST Roger Alford

Hi Roger – interesting post, thanks. The EU-South Korea DS chapter does have a few novelties, but it is very much like the 2002 EU-Chile FTA DS chapter and the EU template that’s been floating around the Mediterranean for the last few years, and as Anon notes, a substantial number of more recent FTAs. Other judicialized (or arbitralized) DS chapters have been around for quite a while, not least of which is the Mercosur system. There might be a constructivist story to be told here about states (and negotiators) with WTO experience (positive and negative) becoming more comfortable with judicial procedures and bringing over WTO rules to the regional or bilateral level. The $64k question in my view is, to what extent, and under which conditions, will parties prefer the arbitral FTA alternatives over the WTO when the big money is a WTO violation concurrent to the FTA. There are many variables in this respect. Marc Busch has argued that it depends on where parties want to establish a precedent (http://www9.georgetown.edu/faculty/mlb66/forum%20shopping%20IO.pdf)
but from a lawyers perspective there are many other factors and I believe its simply to soon to tell – not least because there isn’t a critical mass of FTA DS practice yet. Indeed, FTA DS chapters can be arbitral, but not very transparent, in the sense that because of their bilateral nature, it can be difficult to know if there is any use made of the provisions, and it’s easier for the parties to stray from them, in practice relegating to non arbitral diplomatic methods. And a case like the current Tuna-Dolphin III dispute demonstrates how tactical the preferences might just be.

T.

Another thing worth noting about the EU-South Korea DS chapter is the annex establishing a conciliatory mechanism on NTBs – definitely not arbitral! – and a pressure valve that echoes the proposals being made in the WTO negotiations to essentially allow parties to carve out NTB disputes – which are quite significant, of course – from the WTO dispute settlement system, proposals that (As Anon might know?) I am somewhat critical of.

11.16.2010
at 11:25 am EST Tomer Broude

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